Friday, 16 November 2012

Wise words

At the root of economic nationalism is a belief that foreigners are taking control of what is rightfully ours. The profits that they are generating belong to us, and our children. Economic nationalists believe the state should regulate foreign influence, promoting national interest over that of the foreigner.

Treasury has usefully calculated what it would mean if Australia were to limit the inflow of foreign capital, which appears to be the preferred position of at least some in the Coalition.

In a new study, Treasury analysts consider what would occur if the inflow of foreign money, which has averaged about 4 per cent of gross domestic product over the past four decades, were restricted by one percentage point.

Certainly, Australia would accumulate fewer foreign liabilities, meaning that less would flow abroad in dividends and interest. The currency would fall with reduced demand for Australian dollars, and export volumes would rise as a result.

But these benefits would be outweighed by the fall in investment and the reduction in consumption. Wages would be lower over the long term, while employment would fall in the short term. People would be worse off overall, with national income falling by 0.5 per cent every year for at least a decade.

"Restrictions on capital inflow (including foreign investment) would reduce Australian investment, production and incomes," the study concludes.

It follows that liberalising capital flows would be wealth generating. Foreign capital is supplementing domestic savings to sustain much higher levels of investment than are achieved in any other advanced economy. Foreign direct investment is risk capital. Investors are taking a chance on Australia. Their investments will be serviced with dividends only for so long as they are profitable.

Yes the numbers are based on Australia data but the basic argument applies just as well to New Zealand. What makes us rich is having lots of goods and services to consume. Where the profits from producing these consumables goes doesn't matter. What does matter is making sure that the producers of the goods and services are the most efficient producers of them and allowing foreign investment increases the likelihood of having the most efficient firms doing the producing.